Why should S4 Capital founders be rewarded before trading starts?

Under arrangements that might be more likely to be discovered among footballers than advertising executives, founding shareholders in Sir Martin Sorrell’s new company S4 Capital will enjoy financial gains almost before the newly created business starts trading as a public company.

That’s a gain in value of 74% and is equivalent to having acquired their shares at a discount from the market value of 43%. The original investment preceded S4 Capital’s first acquisition, namely MediaMonks.

Since when has it been healthy business practice to reward people with bonuses before they have actually delivered any profit? It’s not that the recipients will necessarily fail to bring value to their employers, or that they do not deserve to be well rewarded when the results can be seen, but why pay in advance when all the risks lie ahead?

What happens if MediaMonks’ Victor Knaap or Wesley ter Haar leaves within the next five years or so? Will either of them forfeit some or all of their signing on fees? There is nothing to suggest so in the prospectus issued this week.

As for S4 Capital’s founding shareholders who have in effect received their shares at a discount to their market value (arguably as an incentive to invest), if they had any confidence in Sir Martin Sorrell’s abilities, surely they would have expected their shares to gain in value as the business progresses and would not need or deserve any additional inducement to invest and, in doing so, to dilute existing shareholders?

The arrangements at S4 Capital create a questionable precedent, fuelling the cynicism about company executive behaviour that has grown in recent years. Moreover they are in stark contrast to Sir Martin’s long standing love of earn-out arrangements that gear rewards to future company performance (although S4 Capital will also be offering performance related incentives in addition to the above-mentioned up front inducements).

From someone who has been such an influential player in the marketing industry for so many years, it is disappointing to witness actions that seem to set such a poor example. Or is it simply that the people involved are of an age when they are less sure of their ability to deliver and would prefer to be paid in advance, just in case…?

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